When it comes to equity indexes, few if any are as widely followed as the S&P 500. When including all the financial products tracking the S&P 500, on a global basis, there is more than $5 trillion allocated to the benchmark U.S. index.
As far as funds go, including exchange-traded funds, there is over $2 trillion following the S&P 500. The world’s largest exchange-traded fund is an S&P 500 ETF: The SPDR S&P 500 ETF (SPY). In the U.S., SPY, the Vanguard S&P 500 ETF (VOO) and the iShares Core S&P 500 ETF (IVV) are three of the largest ETFs of any stripe.
However, as is often the case with ETFs, size is not a guarantee of success. Sure, S&P 500 ETFs are inexpensive, highly liquid and easy to comprehend. Those are all positive traits to be sure, but those traits do not ensure success for S&P 500 ETFs.
The good news for investors is that there are myriad alternatives to S&P 500 ETFs, including scores of so-called core and total-market funds.
Some of these funds offer noticeably better long-term performance than S&P 500 ETFs. Others closely mirror the returns of the S&P 500 with low fees, sometimes lower than the already inexpensive IVV, SPY and VOO.
Let’s start the shopping for S&P 500 alternatives with the…
S&P 500 Alternatives: PowerShares FTSE RAFI US 1000 Portfolio (PRF)
Expenses: 0.39%, or $39 per $10,000 invested
Chances are if you follow ETFs, you’ve heard about smart or strategic beta funds, one of the fastest-growing segments of the ETF industry.
“Smart Beta equity ETFs/ETPs listed globally gathered US$ 3.0 billion in new assets in October and US$ 53.7 billion in the first 10 months of 2015. There were 764 smart beta equity ETFs/ETPs, with 1,336 listings, assets of US$399 billion, from 106 providers listed on 31 exchanges in 27 countries, according to ETFGI’s new report the Global Smart Beta ETF and ETP Insights report for October 2015,” according to ETFGI, a London-based ETF research firm.
Well, the PowerShares FTSE RAFI US 1000 Portfolio (PRF) is one of, or perhaps THE ETF, that started the smart beta movement. The $4.2 billion fund is closing in on its tenth anniversary and as an S&P 500 alternative, PRF has plenty of merit.
As its name implies, PRF holds 1,000 stocks (1,004 to be precise), which means the fund gives investors a deeper bench than S&P 500 ETFs. That also means more exposure to mid- and small-caps than is usually found in S&P 500 ETFs.
PRF follows the FTSE RAFI US 1000 Index, which “is designed to track the performance of the largest U.S. equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends,” according to PowerShares.
Unlike S&P 500 ETFs, PRF is not cap-weighted. None of its holdings command a weight of more than 2.85%. Top 10 holdings include Dow components Exxon Mobil (XOM), General Electric (GE) and J.P. Morgan Chase (JPM).
PRF charges 0.39% per year, or $39 for every $10,000 invested. That is reasonable among smart beta funds, but pricey compared to S&P 500 ETFs. However, PRF’s long-term performance justifies the higher fee. Since the start of the current bull market on March 10, 2009, PRF is up more than 218% compared to a gain of 170% for the S&P 500.
S&P 500 Alternatives: Guggenheim S&P 500 Equal Weight ETF (RSP)
The Guggenheim S&P 500 Equal Weight ETF (RSP) is arguably the classic alternative to traditional S&P 500 ETFs. Like PRF, RSP can be credited with kicking off a movement that brought choices to investors beyond cap-weighted funds.
Obviously, in the case of RSP, we’re talking about equal weight.
An equal-weight version of the S&P 500, as applied by RSP, leads to some significant differences between this fund and the standard S&P 500 ETFs. For example, technology is RSP’s third-largest sector weight, but it is the largest sector allocation in the S&P 500. Additionally, no stock accounts for more than 0.28% of RSP’s weight.
An anecdote on how RSP works: Apple (AAPL) and United Continental (UAL) both account for about 0.2% of RSP’s weight, even though Apple’s market value is more than 30 times larger than United Continental’s.
RSP charges 0.4% per year, or $40 for every $10,000 invested. That is more than quadruple the annual fee on SPY, but RSP can get away with it because RSP has crushed the S&P 500 during the current bull market with a gain of 232%.
S&P 500 Alternatives: Vanguard Total Stock Market ETF (VTI)
Based on a number of factors, it is hard to beat the Vanguard Total Stock Market ETF (VTI) as an alternative to S&P 500 ETFs. After all, why hold 500 stocks when you can gain access to nearly the nearly 3,800 held by VTI?
VTI has become a favored destination for advisors and investors looking for something more than a plain old S&P 500 ETFs as highlighted by the Vanguard fund’s $57 billion in assets under management. VTI is also more diverse at the top than S&P 500 ETFs, as its top 10 holdings combine for about 15% of the ETF’s weight.
Chances are VTI’s scant annual expense ratio of 0.05%, or $5 per $10,000 invested, is a major selling point as well. That makes the ETF 95% less expensive than the average expenses of rival funds, according to Vanguard data.
Although VTI’s three-year returns mirror those of the S&P 500, the Vanguard fund has offered modest out-performance of the S&P 500 in 10-year returns.
As of this writing, Todd Shriber did not hold any of the aforementioned stocks.
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